Introduction

The term “tied aid” indicates that the recipient is in some way restricted in the allocation of the resources it receives. As already indicated by Bhagwati (1967) these restrictions may take different forms. Aid may be linked to a specific project, to a specific commodity or service, or to procurement in a specific country, in all cases limiting the recipient government's policy options. Even if the donor does not directly oblige the recipient to purchase from the donor, the choice of the sector supported can give a similar result. The most commonly acknowledged way of restricting the allocation of aid is through regional tying. In this respect the OECD's Development Assistance Committee (DAC) distinguishes between untied aid, partially tied aid and tied aid. Procurement for untied aid is obviously unrestricted, while for partially tied aid it is restricted to the donor or any developing country. The remainder of aid is tied aid. Thus, even if, say, Denmark only restricts procurement to any developing country or any country of the European Union, then this is considered tied aid.

Table 8:1 gives an overview of the DAC estimates of untied, partially tied and tied aid over a number of years for ten large donors. A brief look at this table is instructive and allows us to draw some conclusions. First, the extent of tying of aid may vary widely from country to country. In 1989, for example, Australia gave about 10 percent of its aid untied, compared to 75 percent for Switzerland. Second, the extent of tying of aid may vary widely from year to year.